The goal of many of the current regulatory reviews is to improve the service offered to pension funds by increasing competition. So you agree that it’s a problem if new entrants are deterred from moving into the market?
Absolutely. That is why charge caps are not a good policy tool for fixing a deficiency in the market.
Good governance is the answer. We published a discussion paper a few weeks ago that set out how we think that the regulator should approach good governance.
The regulator at the moment is focusing on outputs as opposed to inputs and outcomes. Let me explain that. Rather than saying let’s get really good trustees who are well qualified, who have cognitive diversity, who constructively challenge good-quality advisers and therefore are likely to make good decisions, not to make sure that they have a checklist completed for this. A checklist does not create good governance. Good governors’ create good governance. So if the regulators focused on the quality of the trustee board, the quality of the governance committee and what they were achieving with the outputs that would be a far more successful policy intervention than saying here’s another two, three, five dozen, 200 checklists that you have got to complete.
The Pension Regulator’s new campaign to boost governance standards has been criticised for increasing the burden on smaller funds, but do you think it will be effective?
This is part of their 21st century trustee agenda. Broadly speaking, I’m supportive of that. They are trying to raise the bar. My challenge to them would be to focus on the inputs. Make sure that what you are trying to do is challenge individuals to be better at the job of being pension scheme governors and try to challenge yourself to reduce some of these output measures. If you look at the regulator’s website it is vast. If you look at the UK Corporate Governance Code, the recommended code for how UK corporate boards should operate, it is a well respected piece of work that has been adopted or copied around the world in a number of jurisdictions and is 34 pages long. If you add up the number of pages on regulatory guidance in the codes of practice that are published on the regulator’s website, it is close to 1,000 pages.
So you have lay trustees who are trying to understand and deal with all of that and produce the various statements of policy bits of output that the regulator says that they should produce. That just takes time away from doing the day job, which is making good decisions.
Is the pension freedoms probe needed?
Interestingly, one of the questions that they have posed is: is freedom and choice part of a coherent long-term pension strategy? It is interesting because the answer to that is very, very short. It’s ‘no’.But freedom and choice has certain advantages. It helps to engage people and if it is used sensibly and tactically it can produce good financial outcomes for the individual. So it is not all bad, but it needs to be part of a coherent strategy. We have got to be able to provide people with a framework for making informed decisions and at the moment we do not have that. So we really should be able to develop a set of soft defaults, by soft I mean that they can opt out of that. Really nothing more than a framework, but this is what a good sensible person would do with their accumulated pot. The probe is absolutely right. Probes by select committees can sometimes be a little political because they are trying to make political points. There are genuine concerns about the way that freedom and choice works. We have got to make sure that it is perfectly sensible when there is that constructive challenge to policy.
Will the PLSA be having its say?
Oh yeah. We’ll feed into that debate. It will be led by the DC council, which is Carol Young from RBS. I will no doubt have my say in that I will give her my opinion on these things.
When your term comes to an end and you hand over the reins to the next chair, what do you want your successor to think about the organisation that they inherit?
I would like them to inherit an extension of the organisation that I have talked about just now. It is an organisation that is talking to a much wider group of members and understands those members in a far more thorough way. We as an organisation have got to have a much wider audience but we have got to understand our audience much better than we currently do. We have got to make sure that we are delivering what the membership want.
The benefit of that wide and deep relationship with the membership will mean that we will be producing even better, more constructive and sensible policy output.
So it will be a wider and broader organisation. It might be bigger, it might be smaller. I don’t know. That is not a key metric for us, but it has got to be producing good policy output based on collective intelligence.
